Different Ways to Start Saving for My Kid's College
Saving for college sounds like a mammoth task for a lot of parents, especially those with limited income. Just how do you save enough when the cost of higher education outruns inflation? But there are many ways you can save for college that allow your money's purchasing power to increase. You just have to be shrewd when investing for your kid's college without exposing yourself to unnecessary risk.
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Section 529 Qualified Savings Plans
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Also known as Qualified Tuition Programs (QTP), 529 plans are popular among Americans saving for their children's college. The plans cover qualified expenses including computers, books and college supplies. There are two types of 529 plans: prepaid tuition and college savings plans. The prepaid tuition plan allows you to lock in future tuition rates at a state public college. With a savings plan, you can put your contributions in mutual funds or similar financial tools. The value of your account fluctuates, depending on the investment tool you select. All 50 states and the District of Columbia offer a state section of 529 plans. As of 2011, 32 states only offered college savings and only 17 of them had both plans. Two states offered only prepaid.
Independent Section 529
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A group of private colleges offers a national prepaid taxation plans for private and independent colleges. When you invest in this plan, the returns are indexed by the average increase in private college tuition. Under the plan, the College Savings Bank offers the CollegeSure CD, an FDIC-insured certificate of deposit. It covers tuition and other fees. The other advantage is the interest rate in a CollegeSure CD is guaranteed to always be at least 2 percent even if the cost of inflation is lower. The required minimum investment is $1,000. Subsequent investments must be made in increments of $250.
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Coverdell Education-Savings Account
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You have to invest with after-tax dollars in the Coverdell Education Savings Accounts. It is tax free on qualified distribution. As of 2011, contribution limits were $2,000 per annum. This requires opening an account with a bank, brokerage firm or a mutual fund. The only drawback with CESA is that it attracts fees that can gnaw at the returns. You have to get as many details as possbile before opening this kind of an account to ensure you don't lose money.
Savings Bonds for Education
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This is another way of saving for college, especially if you're investing smaller amounts. You have to use the money on qualified expenses to avoid paying taxes when you withdraw. Qualified expenses include tuition and other fees or any other expenses paid, provided they are part of a degree or certificate-granting program. However, the cost of books, room and board are not included. You must be at least 24 years old to qualify for this plan. The bonds must be registered in the parent's name, but the child must be listed as a beneficiary.
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